S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

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Grounded in some sort of new reality? LOL

The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!

These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.

Hype, financial engineering, and central banks hell-bent on inflating asset prices make a powerful fuel for stock prices.

And there has been plenty of all of it, including financial engineering. Share buybacks, often funded with borrowed money, have soared in recent years. But even that is now on the decline.

Share buybacks by the S&P 500 companies plunged 28% year-over-year to $115.6 billion in the three-month period from August through October, according to the Buyback Quarterly that FactSet just released. It was the second three-month period in a row of sharp year-over-year declines. And it was the smallest buyback total since Q1 2013.

Apple with $7.2 billion in buybacks in the quarter, GE with $4.3 billion, and Microsoft with $3.6 billion topped the list again. Still, despite the plunge in buybacks, 119 companies spent more on buybacks than they’d earned in the quarter. On a trailing 12-month basis, 66% of net income was blown on buybacks.

Alas, net income has been a problem. By now, with 82% of the S&P 500 companies having reported their results for Q4 2016, earnings rose 4.6% year-over-year, according to FactSet. It’s the second quarter in a row of year-over-year earnings growth, after six quarters in a row of earnings declines.

For the entire year 2016, earnings edged up 0.4% from 2015. And revenue inched up 2.4% – in a year when inflation, as measured by the Consumer Price Index, rose 2.8%.




It wasn’t just 2016 that was crummy. Earnings in Q4 2016 were back where they’d been in Q4 2011. This chart by FactSet shows:

  • Net income as reported on a trailing 12-month basis (dark-blue bars, left scale in million dollars)
  • Share buybacks on a trailing 12-month basis (light blue bars, left scale)
  • Buybacks as a percent of net income (green line, right scale).

I added the red line to show how, after a bump in the middle, net income has gone nowhere in five years. And I circled the increases in trailing 12-months net income over the past two quarters to show how puny they’ve been (click to enlarge):

At the same time, over those five years since Q4 2011, the S&P 500 index has soared 87%. Grounded in some sort of new reality? LOL

And it’s even worse. FactSet uses “adjusted” ex-bad-items earnings that companies report under their own metrics. FactSet does not use earnings the companies report under the stricter guidelines of GAAP. These “adjusted” earnings are generally much higher than earnings under GAAP. In some cases, companies might show a big profit on an “adjusted” basis but have a loss under GAAP.

This disconnect between five-year earnings stagnation and soaring stock prices is confirmed by revenues. The S&P 500 price to sales ratio, which tracks stock valuations in relationship to aggregate revenues of the S&P 500 companies, has now reached 1.87, just 8% below its crazy peak back in early 2000 before it all came apart. That ratio was between 1.4 and 1.5 before the Financial Crisis and below 1.0 before 1996 (chart).

The fact that stock valuations in aggregate are levitating beyond the irrational and have lost all grounding in reality does not, however, stop Wall Street from inundating the world with hype. And ultimately, that’s what investors care about; they want their investments to go up no matter what, and they play along willingly. We’ve come to call this phenomenon “consensual hallucination.”  It’s only when this consensual hallucination fades that markets begin to swoon, and they can do so abruptly, after having lost their grounding in reality.

Wall Street hocus-pocus truly has done an awesome job. Read…  Dow Companies Report Worst Revenues since 2010, Dow Rises to 20,000 (LOL?)




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  80 comments for “S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

  1. interesting
    Feb 19, 2017 at 7:04 pm

    I’m so old that remember when a companies stock price was a reflection of it’s profitability…..that is SOOOOO old school.

    it’s different this time……

    • Jungle Jim
      Feb 19, 2017 at 10:48 pm

      That’s why a lot of old school investors like me are keeping their money in the First Bank of Beauty Rest.

      • interesting
        Feb 20, 2017 at 1:48 am

        lol!

        Good one! And probably safer.

        • RD Blakeslee
          Feb 20, 2017 at 11:57 am

          Safe for safer?

          What does Maury Safer say

    • Si
      Feb 20, 2017 at 2:10 am

      @interesting
      With you on that one. I doesn’t matter any more. Everything just keeps going up for ever, IPO’s valued on the rate at which they can burn $$ (more is better obviously).

      I’ve been crouched down so long with my fingers in my ears I am starting to feel like the WW2 Japanese soldier who was still holding out in 1974.

      • Smingles
        Feb 22, 2017 at 12:53 pm

        “I’ve been crouched down so long with my fingers in my ears I am starting to feel like the WW2 Japanese soldier who was still holding out in 1974.”

        Totally aside from this article, but this was a great story that people should look up. I believe he eventually became a school teacher and only passed away two or three years ago.

    • robt
      Feb 20, 2017 at 10:05 am

      Yes, you bought ownership to get dividends. Now dividends are considered evil because the company should be using cash to buy back their own stock and pay interest on loans they took out to buy back more of their own stock, which was excessively issued to grant options, which means the excessive float has to be bought back because too many shares are out there. It is legal, whereas writing yourself a check from the treasury would be illegal.
      This is described as returning value to shareholders. I’m still trying to figure out how a company buying back my shares with my own money (i.e. the treasury money) and never paying dividends, leaving me with no shares is returning value to me. Returning capital, maybe, and possibly but not necessarily a gain. Most buybacks end up being a failure, with the share price falling, as revealed in many studies about looting the treasury.
      These shares often sell at from 100 to 200 times EBITDA – I sure wish I could run a business without paying taxes, and interest, and my equipment/assets never had to be replaced or I even had to amortize the cost of them, and I would never have paid a dividend and never will.

      • John
        Feb 20, 2017 at 6:54 pm

        Sure, just think about yourself. How selfish! Think about the CEO’s who need that extra 20 million to retire.

  2. NotSoSure
    Feb 19, 2017 at 7:25 pm

    Some investment bank just did some calculation and basically P/E = 20 is now the new normal.

    If you think that’s high, trust me wait till the USD really goes supernova. Dow 500K at least. S&P will probably be at 20K.

    I think someone needs to do a calculation on how earnings would look like if the Trump tax plan were to go through. Given companies like Apple are already paying low to no tax, I’ll be surprised if that can become a big contributor to the bottom line. Muppets though will have extra spending power so that will contribute to the top line.

    • Ed
      Feb 20, 2017 at 8:27 am

      Muppets? Only the top of the tax paying heap will benefit from any tax cut if such a thing comes about, and those people keep all that money.

  3. Bobber
    Feb 19, 2017 at 8:07 pm

    I heard the Russell 2000 was trading at a negative P/E if you include all 2000 companies in the computation. In the reported P/E, they hide the overvaluation by kicking loss companies out of the computation.

    • Jessy James
      Feb 20, 2017 at 6:57 am

      Exactly. I suspect there is a WHOLE LOT of hiding going on. Much of it is enabled, maybe even encouraged by the Federal Reserve. I would also suspect that the Fed is playing “price controls” with crude oil prices in the futures contracts market. It makes absolutely no sense for earnings and revenues to be at extremes and oil prices to be this low. The Fed learned in ’08 that high oil prices destroy the economy, or at least the perception that “everything is just awesome.”

      • Michael Campbell
        Feb 20, 2017 at 10:53 am

        From where I stand it actually makes no sense for oil prices to be as high as they are. If any manipulation is going on (aside from the OPEC deal which was designed to prop UP oil prices) it most certainly is on the buy side. There is a massive glut in crude oil and no matter what OPEC or anyone else does it isn’t going away.

        If crude begins to price out the OPEC deal for some reason, or production keeps climbing, and price begins to fall then look out below for the stock market.

    • Andy
      Feb 21, 2017 at 7:56 am

      Read the most recent catalyst endurance fund quarterly letter. Great summary of the small cap space.

      • Bobber
        Feb 21, 2017 at 4:35 pm

        Say again? I did search and couldn’t find it.

  4. pete
    Feb 19, 2017 at 8:07 pm

    Stocks don’t trade on today & tomorrow Wolf, they trade on 6-month & 12-month forward earnings…and who’s to know what the future will really bring… but people like Ray Dalio see & smell ‘animal spirits’ of fewer regs and lower taxes. Who’s to know if and when that all happens but stock traders smell & sense sooner than later. Who knows, maybe their wrong but operating earnings for the S&P are forecast for $133 this year and almost $150 for year-end ’18. Best & good prospects wolf…PJS

    • david
      Feb 19, 2017 at 9:12 pm

      To me animal spirits equal ZIRP nowadays. Take that away and its like busting a balloon with a chainsaw. A 3% ten year trumps a 25% corp tax rate.

    • Petunia
      Feb 19, 2017 at 9:19 pm

      Less regulation in financial markets means more skimming and outright stealing. So given my cynical views that would translate into more losses, not more gains.

    • Feb 19, 2017 at 9:30 pm

      6-month and 12-month “forward earnings” are a fantasy. If you look at past earnings (see article) and compare them to the “forward earnings” as proffered back in those years, you’ll see just how much of a fantasy they are. So yes, stocks are trading on a fantasy. That’s kind of the point of the article :-)

      • RD Blakeslee
        Feb 20, 2017 at 12:00 pm

        Las Vegas or Gulfstream Park fantasy analogous…

        • Duncan Idaho
          Feb 20, 2017 at 4:02 pm

          Actually a Gulfstream Aerospace – Aircraft – G550 for the “Job Creators”

    • NotSoSure
      Feb 19, 2017 at 10:29 pm

      So 6 months and 12 months back, the stock market should have foreseen this debacle and turned down? Is that what you mean by “they trade on 6-month & 12-month forward earnings”.

      How about 6 and 12 months before 2008/2009?

  5. nick kelly
    Feb 19, 2017 at 8:37 pm

    One aspect of our situation doesn’t get much comment because we have become used to it. This is the way the markets, including the market for real estate, but mainly the stock market, have assumed a dominant role in the culture.

    In the ‘Great Crash of 1929’. J K Galbraith notes that everyone was obsessed with the stock market, waitresses, taxi drivers, everyone.

    The famous but probably true anecdote of the shoe shine boy giving stock tips to his millionaire customer, causing the latter to sell, is just one example.

    But in 1929 there were only two types of media, print and radio.
    Today the e-universe is flooded with investment advice, and the consumer can act on the advice online.
    In Canada, when I go to use the debit machine at the super, it may ask me if I want to buy a lottery ticket.
    When I use the ATM it may ask me if I want X free trades when I open an account.
    In the US you have at least one TV channel devoted to investing, and we have one in Canada. But even CNN strives to give us market updates.

    Some of the advice is dubious on its face- especially investing in commodities and worse, currencies.

    One of the myriad charges against Hillary Clinton dates back to when she was merely the wife of the Arkansas Governor.
    She made about 10 K or something trading cattle futures.
    When this hit the fan, quite a few pro traders alleged that, for a newbie, this was about as likely as winning 10 K in a lottery. (Which may not have been the best ad for their biz)
    Most of the rather thin protections for the stock investor are absent for the commodity trader. You are always trading against the house- the trader making a market.
    As it emerged, it is likely the trader handling Clinton’s account was eating losses and passing on gains. This may or may not be connected to her status as the Governor’s wife.
    The idea of Joe with a hundred grand to play with trading currencies is maybe worse.
    The vast majority of individuals trading commodities lose money.

    With the growth of index investing, or Warren Buffet buy- and- hold type investing, the only way to keep fees flowing is to make the average guy think he should be trading.
    Churning is illegal or at least unprofessional, but not if the client wants to move in and out.

    So what is the ‘crowded trade’ that by mathematical certainty can’t pay off much? (if a horse is an overwhelming favorite,he won’t pay much even if he wins)
    Maybe trading or investing at all. Maybe there are too many people investing for it to pay off as much as it takes to justify the risk.

    For obvious reasons- going ‘short’ is not the same as avoiding the market. There is no point being proven right next year,if your short expired this year.

    The last time the culture was this obsessed with markets was 1929.

    • David
      Feb 19, 2017 at 9:13 pm

      Nick

      Maybe you should check your facts before you post. Hillary invested a $1,000 and managed to turn a $98,540 profit which is pretty impressive for a novice.
      The scandal revolves around the fact that she was receiving advice from the general counsel of Tysons Foods. It just so happens that the broker she used and the one Tysons used were one and the same.
      The allegation was that the broker engaged in front running the Tyson order for the Clinton. That means he put the Clinton order in first, then executed the Tyson order which was so big that it moved the market. Then he closed the Clinton position at a profit. Neat, simple and highly illegal. But then it was never proved.
      Before I get the mandatory blow back, I voted for Bill twice and Hillary.

      • david
        Feb 19, 2017 at 9:28 pm

        The guy you are referring to eventually got his license suspended for stuffing trades, although HCs was never proven. Imagine that. I’m sure it was just a coincidence.

        • nick kelly
          Feb 19, 2017 at 10:51 pm

          Maybe you should check my text: ‘or something’ includes the larger figure.
          The details of the trade don’t affect the corpus of the original comment. The topic is not the Clinton trade- it is reaction of the professionals.
          Professionals said her profit was next to impossible. THAT is the point- why were they so sure?
          She achieved it by someone’s manipulation, obviously. but that isn’t the topic which since I posted originally I will reiterate: it was their certainty that since it is almost impossible for an individual to do this well by themselves- the market was rigged against the individual.

          THAT is the point, the pros knew the commodities pit was fixed against the amateur.
          Which is why it should be avoided.

          It’s been 20 years since I read the book about the Clinton’s early days in Arkansas but I’m pretty sure the trader absorbed some of her early losses, because her big win on which you have chapter and verse didn’t happen right away.

      • mean chicken
        Feb 19, 2017 at 10:21 pm

        That’s just it, why vote for obvious corruption? May as well read fake news….

    • Feb 19, 2017 at 9:17 pm

      Hillary Clinton gain

      10 grand indeed ! ! ! !

      This is CROOKED HILLARY :

      http://www.washingtonpost.com/wp-srv/politics/special/whitewater/stories/wwtr940527.htm

      Hey, I don’t make up the name, I am merely reporting it .

      SnowieGeorgie

      • nick kelly
        Feb 19, 2017 at 11:12 pm

        OK- let me amend my post to: Hillary made ‘a lot of money’ trading cattle futures.
        Now that is corrected would anyone like to address the topic: that there are too many people thinking they are traders who are smart enough to beat the markets, which especially in commodities is very unlikely.

        • david
          Feb 20, 2017 at 2:19 am

          And it was her FIRST trading in commodities, makes it even better.

        • Dan Romig
          Feb 20, 2017 at 7:36 am

          Ag commodities are indeed tough to out-trade the markets, but IMHO, soy meal prices can move a bit ahead of corn, wheat and soybeans. For farmers, the trick is to figure out when 75% of the projected yields can be sold for future deliveries. Typically the late fall futures just before planting time in the spring end up being higher than the spot market as harvest comes in. The 75% is used as this is what crop insurance covers in the case of Mother Nature creating havoc.

          Again the numbers can be quite dramatic. A few years ago corn was bringing over six bucks on October contracts in the preceding March, and as the summer moved on, corn slid to four bucks. So $2 times 75% of180 bushels an acre times 640 acres (one square mile) =$172,800.

          Farmers in the Dakotas have, on average, over 1,300 acres, and currently there are 60,800 farms in ND & SD!

        • mean chicken
          Feb 20, 2017 at 8:44 am

          I guess this is a question of timefframe, perhaps? Mix with that the greater fool theory and a dash of the movement of large capital takes time, those who become trapped aren’t disciplined. IMO. Otherwise there are many traps such as clever stories sell stocks.
          Imagine the possibilities managing opm brings if you’re not beyond skimming and scamming.

    • Ed
      Feb 20, 2017 at 8:30 am

      The culture was quite obsessed with the markets in 1999-2000.

    • Petunia
      Feb 20, 2017 at 9:56 am

      Nick,

      I don’t know where to start with your comment because there’s a lot there.

      Firstly, you are right about the financial obsession. In the 80’s financial markets became a form of entertainment, like casino gambling. The financial news channels fed the mania. We are now in Mad Max Thunderdom territory.

      Secondly, you are correct about Hillary’s commodity trading. The traders ate the losses and passed on the winnings.

      Which leads me to the comments, from you and others, about the old commodity pits. When there was price fixing and collusion by traders in the old pits, at least most of the players could see who was doing it. Now they rely on the software blindly and think no one is manipulating the prices. Any and all the trading platforms have the ability to manipulate prices internally. What you see on a trading screen comes from the software, not necessarily the “market”.

    • RD Blakeslee
      Feb 20, 2017 at 12:05 pm

      “The last time the culture was this obsessed with markets was 1929.”

      1637?

      https://en.wikipedia.org/wiki/Tulip_mania

    • Andy L
      Feb 24, 2017 at 3:37 pm

      Nick Kelly is a wise man. Thank you, Nick

  6. david
    Feb 19, 2017 at 9:21 pm

    Except for here, ZH and a small few others…..none of this data sees the light of day. Guess this doesn’t fit “media” narratives. Glad you bring this to light Wolf for those of us too busy to dig it up.

    • mean chicken
      Feb 19, 2017 at 10:27 pm

      I find there’s a lot of real news that’s buried till the right moment.

  7. OutLookingIn
    Feb 19, 2017 at 11:18 pm

    Earnings at six year old levels and the market in nosebleed altitude!

    We are now way past too big to fail since we have the everything bubble.
    Financials.
    Industrials.
    Materials.
    Discretionary.

    The dollar reflation has failed and there’s nothing the Fed can do about it. Each of the past eight years of reflation episodes have clearly failed. At best it has resulted in prolonged periods of stagflation, as there is no additional marginal banking capacity. The diminishing marginal productivity of debt has reached it’s vanishing point. The global currency system as it exists now, has become inherently unstable. Dangerous.
    Reset is coming. Drawing ever closer. It will be spectacular!

    • Meme Imfurst
      Feb 20, 2017 at 9:24 am

      Just think….all of this was done for…”thu Kids” and thu Kids will be living under the freeway.

  8. Paul
    Feb 20, 2017 at 8:28 am

    I spent 25 years as a small business accountant and investor. If I had to do it all over, I would have never even looked at a financial statement.

    There are few bigger wastes of time the financial statement analysis. Luckily, I got out of the CFA program while I still had a life. 2006 I told my clients GM would be in bankruptcy. It was obvious. I was hammered by clients. Now, my prediction is UPS will go under. There’s no way UPS can survice a recession.

    We’ll see.

    In

    • mean chicken
      Feb 20, 2017 at 8:56 am

      How about if USPS is instructed to stand down, think outside the box but keep fundamentals in view. Or gosh maybe GS is building a huge short. Read CNN and be last to know.

    • Meme Imfurst
      Feb 20, 2017 at 9:30 am

      If you want to receive it broken, send it UPS.

      If you want it ‘sign for’ by the neighbors dog, send it UPS

      If you want to have the box sit at the end of the driveway instead of the porch (20 feet away) send it UPS.

      If you want to try to collect on the insurance, I have a bridge to sell you.

      UPS can’t survive itself.

      • Petunia
        Feb 20, 2017 at 9:36 am

        I feel the same way about Fedex.

        • ft
          Feb 20, 2017 at 11:30 am

          Counterpoint: My experience with UPS and Fedex over the past twenty years has been such that I remember the times they went out of their way to service me better rather than the times they screwed up. There are some really good counter-clerks and drivers in both companies who deserve a little recognition for a job well done.

      • Joe100
        Feb 20, 2017 at 4:31 pm

        I have had excellent service from UPS for several years while I have had to rely heavily on Amazon shopping (with mostly UPS delivery) while working full time )at home) and helping my wife through a very serious four-year plus multiple tick-borne infection illness. I can recall only one time when something (my paycheck!) was miss-delivered by UPS, but it was soon after UPS initiated it’s online delivery tracking system which immediately made the mistake clear – so I called UPS who then contacted the driver who recovered the package and brought it to my house.

        I have also had excellent service from FedEx Express for many years, but much poorer service from FedEX Ground (which I avoid where possible).

      • PrototypeGirl1
        Feb 20, 2017 at 10:23 pm

        My UPS drivers are awesome, nothing broken, stairs everywhere with 500 apts. They always come to the door, and we track packages so we know when they’re coming. FedEx and USP not nearly so good, guess it’s the people.

  9. Ed
    Feb 20, 2017 at 8:39 am

    Asset markets have been fueled by free money from the fed for decades now. This is the third big asset bubble since the late 1990’s. The past two have exploded gloriously as prices reverted to the mean and the sheep were sheared.

    • paul
      Feb 20, 2017 at 9:50 am

      It will stay like this until the trade deficit starts to contract. Most people, (Including almost all accountants) don’t understand accounting. The right (The Ron/Rand Paul wing) are the worse.

      The fed never created money. For 25 years their balance sheet never budged. Money was created, as they are designed to do, by banks. Ron Paul doesn’t know this because he’s a pussy doctor. Worldwide money creation was a result of lending to finance trade deficits worldwide. It had nothing to do with the Fed.

      Most of the mending was to finance accounts recievable and acct’s payable for fast growing companies. This is why Bernanke said trade deficits were “necessary”. The deficits make $$ available to be used as bank capital and to be used as trade notes.

      Trump will destroy this trade. If not, his successor will.

    • Bruce Adlam
      Feb 20, 2017 at 11:03 am

      Maybe this time the sheep will go to the slaughterhouse

  10. Mike R.
    Feb 20, 2017 at 8:57 am

    Little doubt that the CEOs of major corps were ‘encouraged’ to take on debt to “buy up” their stock price. Remember Obama met in person with many CEOs over the course of several years. I believe this was to talk in person with what the government wanted them to do and how they would be protected.

    When the next stall comes, you can count on QE absorbing some of this stimulative corporate debt from their balance sheets. Buying corporate debt would look a whole lot better than buying stocks. So they achieve the same thing but the optics will be much better.

    Just a hunch.

  11. Iconoclast
    Feb 20, 2017 at 9:08 am

    The article title is all we need to know. Fubar.

  12. Bobo
    Feb 20, 2017 at 9:37 am

    Note the many forms of statistical malpractice used to justify high stock prices. One example is the “losses don’t count” rule. This is when you count gains from the previous bear market low, not the previous high. So you can say the market more than doubled from 670 or so when actually all gains up to 1550 were just getting back to even with the high in 2007. By this logic if the market collapsed to say 200, you could say that stocks went up 10 times when they just recovered back to 2000 or so.

    • OutLookingIn
      Feb 20, 2017 at 10:18 am

      Markets?
      There are no markets any longer, only manipulation.
      Case in point:
      Despite the “market” being closed for the holiday today, the overnight S&P futures traded up into new record territory! We no longer need any human physical presents, just leave to the machines and algos.

  13. randombypasser
    Feb 20, 2017 at 10:10 am

    “The fact that stock valuations in aggregate are levitating beyond the irrational and have lost all grounding in reality…”

    I beg to differ Wolf.

    The stock valuations, whatever they are at any given moment, are absolutely correct valuations. They are the current given valuations with which the One either does deals, if the One likes the valuations, or the One can wait for different valuations which suit better for the One’s valuation fundamentals. But the given price, the current valuation, is always and absolutely correct one, the reality, no matter how absurd, irrational and insane it might seem.

    If the One’s fundamentals say that some current valuation is absurd in one way or the other, then the One may have better information than all other competitors or the One can have something wrong in the fundamentals in which the One bases the Ones view, give or take. But the trades go on with that given price all the time, regardless of what the One thinks. If trades stop then usually valuations change and after the changes the trade goes on again, regardless of what the One thinks this time.

    And the grounding to reality has very little to do with valuations. Some, yes, but as the stock market etc. “investing” is just one form of a game, betting, the sentiment is more determinative. Until something changes and people taking part on betting start changing their views. Then also the overall sentiment changes and all players revalue their earlier bets and adapt to their new view, usually very quickly.

    So the public current value of a stock is always the correct one in that moment, no matter how insane it seems to be and what the real fundamentals behind it are. Tomorrow it maybe totally different value and it’s also the only correct value of that moment, no matter how insane the value seems to be.
    Claiming something else is like getting annoyed about weather which the One was warned earlier. Current weather is the correct one the One has and the only rational thing the One can do is adapt to it. Getting annoyed about it is irrational and total waste of time.

    • Intosh
      Feb 20, 2017 at 1:11 pm

      TL;DR.

      Only read diagonally. So what you are saying is that the price of tulips was correct and remained correct all along during Tulip Mania?

      A more blunt analogy: German Nazis were “correct” because within their circle/environment/country, what they did was “correct” to their public.

      Basically, what you are saying is that whatever it may be and how ever insane it may be, if the masses think it is “correct”, then it must be.

      I think your definition of “correct” is strange and differs from the conventional one.

    • Intosh
      Feb 20, 2017 at 1:17 pm

      “the grounding to reality has very little to do with valuations.”

      Then your analogy with the weather is totally broken. The current weather IS reality. A more apt analogy would be: “the One” agreeing among themselves that it is sunny and that that is the “correct” weather, and they keep going to the beach; when in fact, it is raining and some predict a hurricane is coming this way.

      • Joe
        Feb 21, 2017 at 12:18 pm

        It is still beach weather but the hurricane is now on the horizon. Wolfs article is an example that the length and breadth of the hurricane may be unlike anything before seen as the markets “correct” function aren’t based on previously seen fundamentals.

  14. Bobo
    Feb 20, 2017 at 10:16 am

    Forms of statistical malpractice:
    (1) losses don’t count
    (2) non Gaap accounting
    (3) leave money losing companies out of P/E calculations
    (4) stock buybacks
    (5) paying bloated prices for acquisitions to conceal lack of organic growth
    (6) concealing losses for many years until a recession comes along, then writing everything off in one quarter
    (7) cutting maintenance expenses to improve cash flow (and cutting below the minimum necessary)
    (8) “forward earnings”
    (9) “beating the guidance”
    (10) changing accounting firms whenever your current firm gets wise to your tricks and won’t allow them
    (11) capitalising what should be expensed, improves earnings for a while
    (12) changing accounting methods to improve reported earnings ( dozens of tricks in this bag)

    • Kent
      Feb 20, 2017 at 12:27 pm

      You, sir, are ready for the C-suite!

  15. Mary
    Feb 20, 2017 at 11:17 am

    I am in my 70s, lucky enough to have a nice nest egg, actively manage my investments. A couple of comments.

    Two/three years ago I began reading Wolfstreet. Impressed by his information and analysis, I became ever more wary about further investing in the stock market. Given low interest rates, bonds seemed pointless, so I just started letting the cash pile up in my account. In other words, ending up like some of Wolfstreet’s commenters with more and more money in the proverbial mattress.

    Within limits, I like and trust my broker, so I’d forward Wolf’s commentaries. She is patient with a good sense of humor, but finally got testy. Her point–everything Wolf says is perfectly true. But if you let yourself become paralyzed, you will not take the risks that allow you to grow your capital. With a tasteful reference to my age, she pointed out that healthcare costs are going nowhere but up. If the party in power has its way, cuts in Medicare are undoubtedly coming.

    Her ultimate point. You can either sit on your cash and watch your savings melt away, or you can accept the fact that, rigged or not, you need to have part of your capital in stocks.

    Arguments?

    • OutLookingIn
      Feb 20, 2017 at 12:05 pm

      Only the “part of your capital” you agree to part with!

    • RD Blakeslee
      Feb 20, 2017 at 12:19 pm

      Gold bugs (or “stackers”, as some call themselves) say you can preserve purchasing power (“capital”) by holding precious metal.

      • OutLookingIn
        Feb 20, 2017 at 1:05 pm

        Not only “preserve” but enhance.
        Silver is up 16.24% in the past year.
        A very nice return, that is also real monetary insurance.
        After all, gold or silver DO NOT fall to zero, as stocks quite often do.

        • NotSoSure
          Feb 20, 2017 at 3:09 pm

          Totally if you buy gold in the 80s and live through the 90s before expiring, your capital will be “enhanced”. Please shove these kinds of BS away. If you want to recommend something, please provide the total history and not just snapshots. Heck Silver went to close to 50 just a few years ago and CRASHED spectacularly.

    • Kent
      Feb 20, 2017 at 12:32 pm

      @Mary,

      As Wolf note’s in his article, the S&P is up 87% in 5 years. That is a tremendous loss for people who have had their money in their mattress.

      • Justme
        Feb 21, 2017 at 11:24 am

        @Kent, That depends completely on whether you were in cash before the market crashed in 2008 or not.

        I refer you to Bobo’s rule 1: “losses don’t count”. Kent, you just invoked the rule!

        >>One example is the “losses don’t count” rule. This is when you count gains from the previous bear market low,

        • Smingles
          Feb 22, 2017 at 1:28 pm

          S&P 500 is up almost 90% in the last five years– note: that does not include the 2009 lows. It actually ignores a big chunk of the recovery.

          The S&P 500 is up over 300% total return since the 2009 lows.

          And from the 2007 highs to today, the S&P is up 85% on a total return basis.

    • doug
      Feb 20, 2017 at 12:51 pm

      You are wise to seek alternative inputs, here and elsewhere. There are plenty of folks who have been ‘too careful’, and plenty who have been too reckless.
      ‘Testiness’ might be a sign that you are on to something…If you don’t need to chase yield, then don’t….

    • robt
      Feb 20, 2017 at 1:03 pm

      At your age, if you’re comfortable with your savings and investments, seeking risk should probably not be your investment management strategy. Remember 2000. And 2008. Are we due again? If not soon, when? Being in your ’70s and having half your nest egg wiped out is not a comforting thought.
      My personal strategy, after being a risk taker (OK, a moderate high roller) in my younger years, is to gamble with 5% or so (pick your own comfort level), just for entertainment, to cure the itch, and maybe even score. Splitting up bank accounts to the max covered by the FDIC provides some measure of security should the whole rotten mess collapse. Also, the bail-in provisions now popular in many, soon all, countries have typically been for amounts over the FDIC-type deposit ‘insurance’. Not really insurance, but that’s another discussion.
      Brokers make money on transactions, not on giving advice, unless the advice results in transactions. Whether you win or lose, they make money. Whether intended or not, the issue of self-interest must be considered. If congenial relations are an influencing factor, just watch how quickly the mood changes from warm to frosty if there’s a margin call that can’t be met instantly after your cash balance is exhausted and holdings liquidated to meet the call.
      How much money does one need anyway? Leaving it to the kids or someone else often just means they’ll probably blow it … and planning for catastrophic illness is depressing.

    • Feb 20, 2017 at 2:40 pm

      That is what financial advisors and brokers HAVE to say in order to not get sued. That’s what they said before every crash.

      But there is a lot of truth to it. Except they forget to point at the risks.

      I’m just pointing out those risks that these brokers and financial advisors will fail to point out. We here do not give financial advice. That’s their job, that’s what you pay them to do. And if you sit on all cash, you don’t need them, and they don’t get paid. So for them, that’s certainly not a solution, ever.

      But you’re doing what you should do: be informed and make the best decisions you can. No one knows the future.

  16. Petunia
    Feb 20, 2017 at 12:19 pm

    During the last 40 years the markets have become the ultimate reality show. Now the next new thing is politics, which is going to be HUGE.

    • robt
      Feb 20, 2017 at 1:17 pm

      It’s not really traditional US-style politics, which was already pretty nasty but which at least had some ‘gentleman’s rules’. Nixon chose not to contest the 1960 election because it would discredit the system in the public’s eyes.
      This time it’s politics banana republic style, with organized subversive overthrow the objective. Considering the effort and determination Mr Trump needed to overcome opposition to get there, it should definitely be an interesting few years.

  17. Tom Kauser
    Feb 20, 2017 at 2:00 pm

    Iwm pegs listing with a p.e. greater than 60 at 60!
    The great recession got everyone involved just as the rules were being changed?
    The next big short movie will be filmed as the Blair witch project and titled “for the love of god free hank Paulson”!

  18. Tom Kauser
    Feb 20, 2017 at 2:05 pm

    The great recession was actually two bank heist!
    One from the banking system followed by the bigger one when hank Paulson stole the recapitalization from congress and gifted it to the two big to fail banks to buy stocks and boy did they ” invest”?

  19. Robert
    Feb 20, 2017 at 3:17 pm

    Nominal market indices hardly tell the whole story. One of the best performers last year was the Caracas IBVC, up over 100%, and to say the economy is in shambles would be an understatement. For a while the markets were doubling daily in 1923 Weimar Germany: is it not true that the overall trend is in line with the growth in the national debt, where every dollar created is considered a dollar added to the GDP?

  20. Bobo
    Feb 20, 2017 at 3:53 pm

    John Kenneth Galbraith once said that financial markets were always celebrating the reinvention of the wheel, in a slightly more unstable form.
    It used to be thought that you should only put money into stocks if you could afford to lose it. Now it’s thought you will lose it if you don’t.

  21. Sporkfed
    Feb 20, 2017 at 9:57 pm

    An aging population will influence immigration policy as well as asset prices for at least
    a few more years. The Fed’s actions are designed to generate demand to prop up prices
    until demand returns.

  22. Mike
    Feb 21, 2017 at 1:40 am

    Wolf, is there such a thing as pS+P price to book ?

  23. PrototypeGirl1
    Feb 21, 2017 at 8:49 am

    Maybe some of the problems with our economy is that our electronic devices are not working nearly as good as we think they are. A good friend of mine and I both got sick on sunday morning, he sent me a message canceling breakfast plans that we never made. I still had a little fever yesterday so I contacted my afternoon job 6 times, 3 dropped phone calls and 3 texts she never got. When she finally called and got through she was thinking I lost my mind, and I’m thinking she’s anti social her phone must be off, got a drinking problem or something, Maybe it’s not us how many times have you heard I never got the message or my phone never rang. Maybe we need to go back to the landline.

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